Topic 2.1 - 2.8 (Microeconomics)

a place where people come together to buy and sell goods

• product = goods and services

• factor = labour market

• financial = foreign + stock exchange

• price goes down = demand goes up

• price goes up = demand goes down

quantity of a good or service that consumers are willing and able to buy (at a given time and price, ceteris paribus)

the demand for a good or a service by a single consumer at a particular cost and at a specific point in time

sum of all individual demands for a good or service

negative

• price determinants = cause a movement along the curve

• non - price determinants = cause a shift of the curve

• income (normal goods, inferior goods)

• preferences and tastes

• price of other products (substitute goods, complementary goods)

• number of consumers

• income goes up = demand goes up

• shift to the right

• income goes up = demand goes down

• shift to the left

• P1 goes up = D2 goes up

• P1 goes down = D2 goes up

• Law of diminishing marginal utility

• The substitution effect

• The income effect

consumption of additional units of a product, the satisfaction (utility) for each additional unit (marginal unit) grows smaller (diminishes) 

price of a good increases, consumers switch from other similar products to this good, for lower price

price of a good decreases, the quantity demanded increases (consumers have more real income to spend) With more purchasing power, consumers are more likely to buy more of the same product

quantity of a good or service that producers are willing to offer for sale (at a given price during specific time period, ceteris paribus)

• price increases = supply increases

• price decreases = supply decreases

• price determinants = cause a movement along the curve

• non - price determinants = cause a shift of the curve

• Costs of factors of production

• Price of other products

• State of technology

• Expectations

• Government intervention

• Number of firms

• Unpredictable events

• Law of diminishing marginal utility

• Increasing marginal costs and the firms supply curve

the cost of producing one additional unit of a good or service for a firm is higher at each level of production than it was previously

state in which the quantity supplied is equal to the quantity demanded

price at which quantity supplied and demanded are equal

P(e)

Q(e)

M(e)

any price at which demand and supply quantities are not equal

when the quantity of a good supplied is larger than quantity demanded (excess supply)

when the quantity of a good demanded is larger than the quantity supplied (shortage of supply)

the forces of demand or supply make markets move to an equilibrium

when economy allocates its resources according to consumer preferences

supply

demand

shortage

excess

allocative efficiency

when the price that consumers pay for a product or service is less than the price they're willing to pay

willing to pay - market price (A = bxhx0.5)

market price - supply price (A = bxhx0.5)

consumer surplus + producer surplus

• Consumer rationality

• Perfect information

• Utility maximization

• rule of thumps

• anchoring

• framing

• availiability

the idea that customers are rational only within limits

Measures responsiveness of a variable to changes in price of the variables determinants (ceteris paribus)

• Elasticities of demand

• Elasticities of supply

A measure of how much the quantity demanded of a product changes when there is a change in price

Price elasticity of demand

(percentage change in quantity demanded) / (percentage change in price)

(new - old) / (old)

• how consumers respond to changes in the price of a product

• aware of effect that changes in price will have on market demand

• deciding which goods to place taxes on

inelastic demand (quantity demanded is relatively unresponsive to price)

elastic demand (quantity demanded is responsive to price)

unit elastic demand (percentage change in quantity demanded equals to percentage change in price)

perfectly inelastic demand (quantity demanded is completely unresponsive to price)

perfectly elastic demand (quantity demanded is infinitely responsive to price)

• Substitution

• Income

• Necessity

• Habits, Addictions, Fashion, Taste

• Advertising and Brand Loyalty

• Time

• Durability

• Cost of switching

P x Q

• taxes = price goes up

• price goes up = big change in demand

• low tax revenue for government

• taxes = price goes up

• price goes up = small change in demand

• high tax revenue for government

measure of the responsiveness of demand to changes in income

Income Elasticity of Demand

(change in quantity demanded) / (change in income)

• income increases, demand increases

• normal good

• demand for the good does not respond significantly to a change in income

• inferior good

• income inelastic demand

• percentage increase in income = smaller percentage increase in demand

• goods are necessities

• income elastic demand

• percentage increase in income = bigger percentage increase in demand

• luxury goods

increases on a large scale

decreases on a large scale

large falls in sales

• primary

• secondary

• tertiary

accurate way to illustrate YED

A measure of the responsiveness of the quantity of a good supplied to change in price

price elasticity of supply

(percentage change in quantity supplied) / (change in price)

supply price is inelastic (quantity supplied is relatively unresponsive to price)

supply price is elastic (quantity supplied is responsive to price)

percentage change in quantity supplied is equal to percentage change in price

quantity supplied is completely unresponsive to price

quantity supplied is infinitely responsive to price

• Time period

• Ease and cost of factor substitution

• Degree of spare productive capacity

• The level of stock

raw, unprocessed materials

lower

• are imposed on spending to buy goods and services

• are partly paid by consumers but are paid to the government by producers

• as a source of government revenue (on inelastic PED goods)

• a method to discourage consumption of demerit goods

• redistribute income (taxes on luxury goods)

• improve the allocation of resources

a fixed amount of tax per unit of the good or service

a fixed percentage of the price of the good or service

parallel shift in the supply curve

increases

• the market equilibrium is increased

• price is increased

• quantity demanded is decreased

pivotal shift in the supply curve

• equilibrium reduced (with higher price)

• higher price

• quantity demanded is lower

Individuals that have an interest in something and are affected by it

price goes up = demand goes down

price goes down = demand goes down

revenue goes up

demand goes down = unemployment goes up

demand goes down = under-allocation